Hedge funds and large money managers usually invest with a focus on the long-term horizon and, therefore, short-lived dips or bumps on the charts usually don't make them change their opinion towards a company. This time it may be different. The coronavirus pandemic destroyed the high correlations among major industries and asset classes. We are now in a stock pickers market where fundamentals of a stock have more effect on the price than the overall direction of the market. As a result we observe sudden and large changes in hedge fund positions depending on the news flow. Let’s take a look at the hedge fund sentiment towards Farmer Brothers Co. (NASDAQ:FARM) to find out whether there were any major changes in hedge funds' views.
Farmer Brothers Co. (NASDAQ:FARM) was in 13 hedge funds' portfolios at the end of the third quarter of 2020. The all time high for this statistic is 16. FARM has experienced a decrease in activity from the world's largest hedge funds in recent months. There were 16 hedge funds in our database with FARM holdings at the end of June. Our calculations also showed that FARM isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video for a quick look at the top 5 stocks).
Video: Watch our video about the top 5 most popular hedge fund stocks.
Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. Our research has shown that hedge funds' small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 66 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
Phillip Gross of Adage Capital
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 15 best blue chip stocks to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website. Now let's take a gander at the key hedge fund action regarding Farmer Brothers Co. (NASDAQ:FARM).
Do Hedge Funds Think FARM Is A Good Stock To Buy Now?
Heading into the fourth quarter of 2020, a total of 13 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -19% from the previous quarter. The graph below displays the number of hedge funds with bullish position in FARM over the last 21 quarters. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Farmer Brothers Co. (NASDAQ:FARM) was held by Trigran Investments, which reported holding $9.6 million worth of stock at the end of September. It was followed by Adage Capital Management with a $3.8 million position. Other investors bullish on the company included Renaissance Technologies, Levin Easterly Partners, and GAMCO Investors. In terms of the portfolio weights assigned to each position Trigran Investments allocated the biggest weight to Farmer Brothers Co. (NASDAQ:FARM), around 1.74% of its 13F portfolio. Levin Easterly Partners is also relatively very bullish on the stock, dishing out 0.11 percent of its 13F equity portfolio to FARM.
Since Farmer Brothers Co. (NASDAQ:FARM) has experienced declining sentiment from hedge fund managers, it's safe to say that there were a few funds that elected to cut their entire stakes heading into Q4. It's worth mentioning that Constantinos J. Christofilis's Archon Capital Management cut the largest stake of the "upper crust" of funds watched by Insider Monkey, totaling an estimated $1.2 million in stock. Cliff Asness's fund, AQR Capital Management, also cut its stock, about $0.5 million worth. These moves are important to note, as aggregate hedge fund interest was cut by 3 funds heading into Q4.
Let's check out hedge fund activity in other stocks similar to Farmer Brothers Co. (NASDAQ:FARM). These stocks are Acme United Corporation (NYSE:ACU), Strattec Security Corp. (NASDAQ:STRT), Citizens Community Bancorp Inc. (NASDAQ:CZWI), Nabriva Therapeutics plc (NASDAQ:NBRV), Gevo, Inc. (NASDAQ:GEVO), Innodata Inc (NASDAQ:INOD), and Aravive, Inc. (NASDAQ:ARAV). This group of stocks' market values are closest to FARM's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ACU,2,7700,0 STRT,3,12559,0 CZWI,5,10811,0 NBRV,10,4863,2 GEVO,4,847,2 INOD,1,3587,-2 ARAV,7,4429,0 Average,4.6,6399,0.3 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 4.6 hedge funds with bullish positions and the average amount invested in these stocks was $6 million. That figure was $22 million in FARM's case. Nabriva Therapeutics plc (NASDAQ:NBRV) is the most popular stock in this table. On the other hand Innodata Inc (NASDAQ:INOD) is the least popular one with only 1 bullish hedge fund positions. Compared to these stocks Farmer Brothers Co. (NASDAQ:FARM) is more popular among hedge funds. Our overall hedge fund sentiment score for FARM is 76.4. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 32.9% in 2020 through December 8th and still beat the market by 16.2 percentage points. Unfortunately FARM wasn't nearly as popular as these 20 stocks and hedge funds that were betting on FARM were disappointed as the stock returned -1.6% since the end of the third quarter (through 12/8) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.
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Disclosure: None. This article was originally published at Insider Monkey.